BNZ tax avoidance case winding up

Subject: BNZ tax avoidance case winding up Mon Jun 29, 2009 1:12 am

A $641 million tax avoidance case between the Bank of New Zealand and Inland Revenue is winding up in the High Court at Wellington.

After 10 weeks of testimony involving about 20 expert witnesses, Inland Revenue lawyer Brendan Brown QC began his closing arguments, saying the BNZ had sought to avoid paying tax on some international financial transactions in the most obvious way.

BNZ is the first of the four main trading banks to challenge the Inland Revenue's claims of tax avoidance by using so-called structured financial transactions between 1998 and 2002.

In total the banks have been assessed to owe about $2 billion in unpaid taxes and interest. BNZ made six individual loans of $500m each for up to five years to several big overseas financial institutions at unusually low interest rates.

The transactions generated tax losses through fees and hedging costs which the bank was then able to use to offset other taxable income.

In his closing Mr Brown told the court the transactions exploited domestic and cross-border tax rules and provided benefits by reducing the tax liability for the bank and transferring part of that benefit to the foreign institutions through fees.

Some BNZ witnesses argued during the trial that selling money to the institutions was no different to any business selling a product.

Once a sale was agreed on it was normal and legitimate for the parties to find the most tax efficient way of funding the deal, the experts had told the court, Mr Brown said.

But in this case it was the tax benefit which was the driver for the deal, he said.

Some of the banks own witnesses also agreed that without the favourable tax effect the transactions would not have been entered into.

"These transactions were in the bank's own words tax driven," Mr Brown said.

There was no commercial or business rationale underlying the transactions, which were loss-making from day one.

"They are arrangements designed to avoid tax in the most ordinary and obvious sense of the term," Mr Brown said. The structure of the transactions could have allowed the BNZ to pay no tax.

"This arrangement enabled the bank to pay no tax at all, or as little as it wished," Mr Brown said.

Leading accountant and BNZ witness John Hagen told the court during the trial the bank was aware of the need to be seen to be paying a reasonable effective tax rate as part of being a good corporate citizen.

But there was "nothing sinister" in the bank's actions, Mr Hagen said.

Other witnesses said the transactions were driven by the institutions looking for cheap funding and the BNZ finding the most tax efficient means of providing it.

http://www.stuff.co.nz/business/industries/2480412/BNZ-tax-avoidance-case-winding-up

BNZ tax avoidance case winding up

BNZ tax avoidance case winding up

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